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ECON 101 Lecture Notes - Lecture 14: Infant Industry Argument, International Trade, Comparative Advantage

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School
SDSU
Department
Economics
Course
ECON 101
Professor
T.Myers

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Document Summary

Most international trade is not between the governments of different nations but rather between the people and firms located in different countries. Like other voluntary exchanges, international trade occurs because both the buyer and seller expect to gain, and generally do: if both parties did not expect to gain, they would not agree to the exchange. International trade leads to mutual gain because it allows each country to specialize more fully in the production of those things that it does best according to the law of comparative advantage. Trade makes it possible for each country to use more of its resources to produce those goods and services that it can produce at a relatively low cost. With trade, it will be possible for the trading partners to consume a bundle of goods that it would be impossible for them to produce domestically.

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Related Questions

The law of comparative advantage states that:

a. each country should specialize in producing the good with the lowest opportunity cost.

b. a country that is able to produce something using fewer resources than other countries would gain from specialization and trade.

c. international trade barriers slow the introduction of new goods and better technologies.

d. countries can gain from trade if production is subject to economies of scale.

e. countries must agree on how much of one good exchanges for another.

Discuss and explain the difference between the two.

The principle upon which Adam Smith first claimed that free trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing the in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantages.

Comparative Advantage is first fully stated by David Ricardo in the early nineteenth century, this concept holds that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods in which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.

19) A person who has an absolute advantage in the production of all goods will A) not have a comparative advantage in the production of any goods. B) produce all goods at the lowest opportunity coot. C) have a comparative advantage in the production of only some goods and not others. D) not be able to gain from specialization and trade. E) also have a comparative advantage in the production of all goods.